Chance of an IRS Audit Small and Shrinking

Chance of an IRS Audit Small and Shrinking

Fewer Auditors, Fewer Audits

Congratulations! Your odds of being audited by the IRS hit the lowest level in nearly ten years in 2014, and it is expected to fall even further in 2015. The total 2014 audit rate, including audits by correspondence and those conducted in-person, dropped to 0.86%. This continues a pattern that broke a previous 2005-2010 trend of increasing audits peaking at 1.11% of individual returns. Since that time, the total number of audits has decreased 21.4%.

The primary reason is pretty simple: fewer IRS agents mean fewer audits. According to IRS Commissioner John Koskinen, there are approximately 11,600 auditors — the lowest number in nearly ten years.

The agency has suffered from increasingly bad publicity and charges of political manipulation over the past few years, and the IRS budget has consequently suffered . According to Koskinen, the IRS budget has dropped by more than $1.2 billion over the last five-year funding period, and fell from $11.2 billion last year to $10.8 billion in 2015.

The total number of tax returns reviewed in 2014 dropped to 1.24 million, an 11.5% drop from 1.4 million in 2013. Field audits that require in-person meetings dropped 15% overall while correspondence audits dropped 10% overall.

If you are a higher-wage earner, you have even more reason to cheer. Higher-income Americans are still much more likely to be audited, but the decrease in audit rates is arguably tilted toward the wealthy. There was a 26% increase in returns for taxpayers with incomes of at least $1 million dollars, while the audit rate fell from 10.85% in 2013 to 7.5% in 2014. Meanwhile, there was a small decrease in the number of returns reporting incomes of less than $200,000, and the audit rate dropped from 0.88% to 0.78%.

Before you cheer about having fewer people at the IRS, consider that the collective lack of staffing probably means that refunds are also likely to be delayed. In addition, there must be an inflection point where significant money is owed but not being collected because of the lack of agents to audit true tax cheaters. Koskinen says that each trained auditor generates approximately $1.2 million per year annually that otherwise would be left out of the coffers, and cites IRS data that shows a restoration of staff levels would bring in an extra $1.3 billion in tax revenue once their training cycle was complete.

Consider that business audits are also decreasing. Business audits fell last year by 6% overall, and audits for corporations with above $10 million in assets declined by a whopping 20%. Given that the relative audit rates are decreasing at even higher rates for larger sources of income (corporations and wealthy individuals), Koskinen’s argument about staffing levels and their return in tax revenue may carry some weight.

Barring some revolutionary change in the tax code, this decrease in audits is probably a temporary condition. While the IRS will probably always remain unpopular, at some point, legislators will review the revenue picture and increase the IRS enforcement budget to try to raise tax revenues. In the meantime, enjoy this period where you are less likely to undergo the headaches and potential penalties of an IRS audit.